Kathy Prochaska-Cue is an associate professor and extension family economist in the College of Education and Human Sciences at the University of Nebraska-Lincoln.
Having money doesn't guarantee happiness, Prochaska-Cue says, but not having it or not knowing how to manage it can easily lead to disaster.
She talked about debt and how to manage it in this series of interviews for Money Smart Nebraska Week. Her edited responses follow.
Q: How debt-burdened are people, in general?
A: It varies by situation. People are feeling the uncertainty in the economy and, consequently, the perception of their debt could be more than the actual dollar figure.
Even here in Nebraska where our economy isn't the best it's been better than a lot of places, people just feel uncertain. A lot of us aren't in a position to say we're going to go back to acting like we used to. It's not going to happen. People are more aware of their debt load, where before if they could make minimum payments it was, ‘OK, I'm not going to worry about it.' Now we're not as cavalier about our debt. Some people always felt that way, but there are more of us in that situation now.
Q. Could the recession have a silver lining in that it forces people to become more aware of financial issues, of budgeting, of what it takes to live within your means?
A. Definitely so. It's forced people, particularly younger people and families, to see the value of savings and the necessity of savings. They might remember this message when things get better, and they might continue to be cautious about going into too much debt.
For older people it's tough. They don't have time to build their net worth back up. For younger people it's a wake-up call. The recession could bring about the same kind of behavior changes that the Depression did for that generation.
Q. Is it possible to be “debt-free”? We've heard there is good debt and bad debt; is that true?
A. Yes, it is possible to be debt-free, and for some people it's a good goal. Is debt a good thing? It depends — I know that answer sounds like an economist. But it depends on your situation and goals, and where you are in your life.
I've met some people who are debt-free. They made a conscious effort to pay off their debts, and that's how they live now. Is it good for the economy? I'm not sure; the economy is such a complex animal now.
Realistically, for most people it's advisable to be ‘responsible' with the amount of debt held. Keep track of your debt load, not just whether you can afford minimum payments. We kind of forgot the necessity to know our total debt load, what our goals are and whether one of those goals is to be debt-free by a certain age.
Some financial advisers will say that people should carry a certain amount of debt because of the tax benefits — I'm talking about mortgage debt — and because it frees up cash for other things, such as a pool of retirement money.
On the other hand, for many people it's a peace-of-mind thing. If you're debt-free your budget looks very different. There's more money, and that's comforting.
Q. How do people's situations or your advice about debt differ from previous recessions you've observed, in 1991, for example?
A. A major factor is the unemployment rate, which is much higher than in 1991. It causes a lot of people to ask, ‘How secure is my job and the security of the income we have?' We've learned that no one's job is totally secure. And if you own a business, what is the guarantee that it will be viable in the future?
A concept that financial counselors have talked about for years but that people now are seeing the advantage of is an emergency fund, three to six months of expenses put away to live on. In today's economy, plan on six months' savings to tide you over until you find a job.
Another related concept is a revolving-expenses fund for expenses that occur once or twice a year, such as some insurance premiums, vehicle taxes, gifts or the family vacation. You put away money from every paycheck so you don't have to cover those bills from current cash flow. It's a way to manage expenses and avoid using credit cards. It takes a couple of years to get this kind of fund up and going, but once you do, it's great peace of mind.
Then there's the dreaded B word: budget. More people are willing to do that, to be more aware of where the money is going as a way to manage expenses.
Q. Any other changes you've noticed in people's behavior regarding debt?
A. People are a bit more cautious when making purchases. They ask questions like, ‘Do I really need this, or is it just a whim?'
I had lunch recently at a coffee shop-deli kind of place. Someone from one of Lincoln's wealthier families was eating there. She went to buy a muffin and asked how much it was. I thought, ‘Hmmm, it's not just people who are really stretched financially.' But maybe that's one of the reasons they have money — they've always acted that way.
Contact the writer:
444-1050, pat.waters@owh.com
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